Startups can raise USD 3 million via ECBs annually: RBI

Reserve Bank of India (RBI) on 27 October 2016 permitted startups to raise external commercial borrowings (ECBs) of up to USD 3 million in a financial year. Under this, Funds can be raised with a minimum maturity of 3 years.

The move is aimed at boosting innovation and promoting job creation. The RBI said while issuing norms for ECB route for startups that the borrowing should be denominated in any freely convertible currency or in Indian Rupees (INR) or a combination thereof.

Highlights

• In case of borrowing in INR, the non-resident lender, should mobilise INR through swaps/outright sale undertaken through bank in India.

• The regulator has not prescribed any cost-ceiling or restriction on the end use of the funds raised. Such conditions are applicable to borrowings by companies across most other sectors.

• The detailed rules would apply to startups looking to raise foreign borrowings, keeping restrictions on such funds to a minimum.

Who can be a Lender?

As per the RBI notification, lender/investor shall be a resident of a country who is either a member of Financial Action Task Force (FATF) or a member of a FATF-Style Regional Bodies; and shall not be from a country identified in the public statement of the FATF as:

• A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply.

• A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

Exclusion: Overseas branches/subsidiaries of Indian banks and overseas wholly owned subsidiary/joint venture of an Indian company will, however, not be considered as recognized lenders under this framework.

The directions for ECB were issued under section 10(4) and 11(2) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

External Commercial Borrowings (ECB)

• ECB is an instrument used to facilitate the access to foreign money by Indian corporations and PSUs (public sector undertakings).

• ECBs include commercial bank loans, buyers' credit, and suppliers’ credit, securitised instruments such as floating rate notes and fixed rate bonds etc. credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.

• ECBs cannot be used for investment in stock market or speculation in real estate.

• The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.